A Novice Guide to Understanding Car Loan to Value Ratio

Ever wondered how financial institutions like banks come up with the amount they lend to individuals who are applying for an auto loan?

These financial institutions look into many different factors to evaluate risks. Credit History and Credit Scores are some of the widely known and familiar factors, as well as a person’s current debt and income. These financial institutions look and weigh in these factors in a different way for one another.

One factor that is frequently and usually overlooked until the very last minute is the individual’s actual worth itself.
Understanding a little business term called Loan to Value will aid anyone to understand how financial institutions make a decision on the value an individual can loan to procure the asset – a vehicle, in this case.

The fast-paced world of the automotive industry, a Loan to Value or in this instance, a Car Loan to Value is the risk factor that all financial institutions evaluate upon deciding and determining to whether or not approve a Car Loan. The loan itself is the amount that a financial institution is prepared to lend you, and the value is related to how much the asset in question, which the loan is supposed to use, is worth.

A financial institution’s LTV percentage is what determines the actual amount that it will typically allow to finance an individual applying for a car loan. There are a number of financial institutions that allow car loans up to 100% of the car’s current market value, while other allow a lower amount, requiring in most cases, the need of a down payment for the vehicle.

This is because from a financial institution’s point of view, a loan is considered as an active investment in your desired asset. The probability of a financial institution losing money on its investment actually increases as the value of the asset goes down and decreases. This is the reason why having a high LTV ratio is regarded a high risk for most financial institutions.

The formula financial institutions use to compute and evaluate the Loan to Value is as follows: the equivalent of the amount of money financed for the car loan that is divided by the current market value of the vehicle. The Loan to Value is usually the invoice price amount for brand new cars. And the trade of wholesale value is used for Pre-owned cars, this is done in order to establish the vehicle’s value as well as not to exaggerate the expected sale or exchange value for the vehicle.

Having a lesser Car Loan to Value Ratio means the car is worth is greater that the financed amount. Typically, having a lower LTV ratio, the greater the appeal it has to a financial institution, like a lender, bank, or a credit union. Many financial Institutions have set LTV limits, which is why ensuring that the LTV is calculated is important for any individual eyeing to purchase a vehicle, may it be brand new or pre-owned.

Please take into mind that LTV is just one of the major factors during evaluating the risk of whether or not to approve an individual’s loan application. It is best to do a bit of research to get your money’s worth.

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